Friday, August 26, 2011

A note on Tata Steel


Commenting on my blog of 25/8/2011, Suresh raised two questions; one on the falling prices of some of the prominent stocks like Tata Steel, JSW Steel etc. and the second was regarding liquidity in the hands of retail investors.  Since I though these issues need to be elaborated, I decided to make it a fresh post.

Let me take Tata Steel for example, a stock in which I have some interest.  The 52 week high/low for this stock is 737/418.  What is more interesting is that it traded at around Rs.600 during the first week of July then fell to the current level of Rs.422.  This period coincides with the fall in most of the major indices.  The stock is currently trading at a P/E of 5.4, whereas the industry P/E is 7.43.  The sales are growing at 20% and the profit at 30%.  The dividend yield is 2.85%, which is fairly high in Indian markets.  With infrastructure sector expecting a fillip, the steel prices are expected to go up, which would definitely improve the profitability position of Tata Steel.  With all the above facts, I leave the decision on Tata Steel to my readers. 

If somebody picked this stock at 600 levels with an intention of making quick money by selling the same in a couple of weeks, I wouldn’t call him an investor; he is a speculator.  A speculator has no reason to cry when the markets crash, as he must anticipate and be willing to accept huge downside risk.  But if someone bought this stock with an intention of holding it for fairly long term, why is he worried about the current volatility?  Once an investor picks a stock, after making reasonably good analysis of the fundamentals, what he should worry about is not the fall in price, but the reason behind the fall.  If the fall is attributable to an overall fall in the market, that’s alright.  But if the fall is caused by dilution of the fundamental strength of the stock, which prompted him to buy, then he needs to worry (take the case of SKS microfinance).

Let me briefly touch upon the second aspect of retail investors not having sufficient liquidity.  This is where investor education plays a role.  Retail investors can either use MFs or have some systematic investment formula, which results in reduction of average price over a period.  This would bring some discipline, in the sense that he earmarks certain amount for equity investment every month.

Thursday, August 25, 2011

Where are we Investing?

Just take a look at Sensex, the most talked about indicator of Indian stock markets, which has fallen from 20561 points in January this year to the current level of 16284 points - a fall of 20.80% (31.20% annualised) in eight months.  What is more interesting is that it lost 2030 points during the last three weeks.  An obvious question is where do we invest during such testing times?

Let me ask a more mundane question?  What did really go wrong with the economy during the last three weeks?  I would say nothing much.  The reaction that we saw in the market is due to two influencing factors: (a) the burgeoning debt crisis of USA and Europe and subsequent downgrading of USA by S&P; and (b) increasing price levels.  Even though inflation is a concern, it would definitely ease in the medium-term.  But are we bothered too much about US debt crisis?  I personally feel that the Indian economy is fundamentally strong and is driven by domestic demand.  What we are witnessing now is only an over-reaction.  Therefore, this is the right time to invest in stocks. 

I normally draw parallels between a super market and stock market.  People rush to super market when the prices are low or during discount sales.  But why do we shy away from stock markets when the prices are falling?  If one picks some fundamentally strong stocks at reasonably low price, it would definitely offer great returns in the long run.  I would like to add a word of caution: Do we buy anything and everything from a super market, just because they are available at throw away prices; or do we also check the quality?  Similarly, it is not advisable to over-indulge and blindly create a portfolio of stocks that are available at very low prices (or low P/E).  Pick good stocks and stay put for a long time: I am sure there will be no regrets!  Happy investing. 

Wednesday, August 24, 2011

Why this Blog?

In 2009, we organised a Training programme at SIT on Fundamentals of Investments titled 'FINSIGHT'.  The programme evoked good response with about 70 participants from various walks of life.  Subsequently, the idea of starting a blog for sharing thoughts/concepts and ideas relating to finance struck me.  But it took some time for me to actually do so.

This blog - Finsight - aims at sharing thoughts/ideas/concepts/analysis and real life experiences from the world of Finance.  Hence its sub-title is 'Insights from the World of Finance'.  I percieve three types of people interested in this blog.
  1. My Students: I would be scribbiling my ideas regularly relating to the concepts taught in the class room.  Sometimes it so happens, that after I complete a session, I feel as an after thought, that the same concept could have been explained in a much better manner; or I feel that there are some more relevant examples/illustrations to make the concept more clear; or there may be some extensions of the concepts.  I would like to scribble all these through this platform.
  2. My ex-students: During the last 15 years I had the opportunity of teaching some highly intelligent students.  Today they are occupying various positions in the industry.  I would request them to share their experiences and add their wisdom to the posts that I make.  This would result in a process of collective learning for all of us.
  3. My Friends: I am sure many of my friends would like to keep track of some of the basic and latest concepts/practices in Finance.  
 A Warm Welcome to FINSIGHT.